One of the most influential inventions of recent decades is blockchain technology which has led to the emergence of cryptocurrencies. Blockchain was first introduced by Stuart Haber and Scott Stornetta in the early 1990s, who were trying to solve major problems in digital information security by creating a system of blocks that could prevent modification, ensuring data integrity as well. However, this technology only became widely known in 2008 when Satoshi Nakamoto launched Bitcoin: The First Generation of Cryptocurrency as a peer-to-peer electronic payment system based on blockchain technology. Since then, blockchain has developed rapidly, and the emergence of cryptocurrencies is seen as a turning point that could radically transform the global financial regime. It has become one of the hottest topics that has garnered a lot of attention, not only from commercial entities, but also from countless governments and international organizations. This article will analyze in more detail the impacts of cryptocurrencies on the global political economy and the factors that led to their decline after 14 years of glory.
Cryptocurrencies: A Disruption to the Global Political Economy?
Cryptocurrencies have evolved into digital currencies capable of removing the delicacies of conventional financial transactions by using blockchain technology at its core. Financial transactions today depend solely on the existence of trusted third parties, and the implementation of completely irreversible transactions, for example, is almost impossible to achieve in the current mechanism, since financial institutions are probably not willing to arbitrate disputes due to its high costs. Therefore, there would be no guarantee of fraud protection for producers and consumers in any monetary settlement, as the whole process is based on trust. Instead of trust, cryptocurrencies embraced cryptographic proof: used peer-to-peer networks using proof-of-work to record public transaction history to prevent double-spending; it would therefore be impossible to cancel the transactions that have been carried out. This way, the possibility of fraud can be minimized or even eliminated. Additionally, as the peer-to-peer network also works to remove the use of trusted third parties, transaction fees can be set at the lowest point of 0.1% of the total transaction amount.
Another important feature of cryptocurrencies is the idea of decentralization: creating a spectrum where people can take charge of their finances without a central authority within the network. Blockchain technology that supports cryptocurrencies, enables the creation of a decentralized design that could allow users to access the payment system at any time without a single point of failure – no middlemen and controls exist, thus transactions could still be sent and received instantly, even the users’ account could not be “frozen” at all costs. After all, cryptocurrencies were designed to free people from limited electronic transaction processes, and built-in decentralization restores that vision.
The first generation of cryptocurrencies were created to critique a two-tier monetary system made up of central and commercial banks that combine public and private money in a hybrid money game. With this arrangement, the standard monetary system is weighted with political control and coercive power to achieve stability. However, what caused hybrid gambling to stabilize may also be the factor of instability that was visible during the financial crisis of 2008. Bitcoin at the time emerged as a political experiment to promote a whole new different gambling without coercive power or large institution. except for what might be provided by computational coding. As the genesis of cryptocurrencies was the emergence of distrust in existing gambling, their popularity also grew alongside the failure of the monetary system. The Cyprus crisis of 2012 marked a turning point as people became more aware of the covert political aspects of mainstream gambling. This has led to a surge in interest in bitcoin-related applications, especially in states suspected of having problems in their banking sectors.
Cryptocurrency adoption then began to gain a solid footing in the early 2010s when bitcoin enthusiasts launched a campaign to fight the good fight against established gambling perceived as oppressive and restrictive. First from political challenges to eclipse the national and global monetary system, cryptocurrencies have developed into payment options accepted by many merchants such as e-Bay and Airbnb. Cryptocurrencies have not only evolved as a minimum of exchange, but also as tools to store value where people keep their crypto-asset wealth. By 2021, the market capitalization of crypto-assets has tripled to an all-time high of $2.5 trillion. Significant economic activity has also been generated due to the rapid growth and spread of cryptocurrencies. For example, there are opportunities for new businesses like mining equipment manufacturers as well as a rapidly expanding market for investors. Initial coin offerings (ICOs) and tokenization have grown in popularity in the market, popularizing cryptocurrencies as a means of funding.
The development of cryptocurrencies helps to introduce an auditable and transparent payment system. Their existence might challenge today’s well-established gambling, but at the same time, it also lays a solid foundation for realizing the idea of a cashless society. Cryptocurrencies could play an important role in bridging the transitions. However, despite the myriad benefits of its rapid growth, cryptocurrencies are still seen as disruptive innovations in the global political-economic landscape. The rapid expansion of the crypto ecosystem is accompanied by the emergence of new entities, some of which have poor operational, cyber risk management and governance frameworks. Therefore, the crypto ecosystem is exposed to significant downtime risks due to poor designated systems, the risk of hacks targeting consumer funds, and unbalanced distribution of crypto assets that could lead to losses for investors. These risks may seem insignificant on a small scale, but as the popularity of crypto increases, they threaten global financial stability.
Moreover, the transparency offered by cryptocurrencies has become a double-edged sword. Transactions are recorded in a public register validated using a calculating machine; therefore, transparency may be warranted. However, the protocols are designed to ensure that the computer solving the problem does not know what transaction it is currently working on, which has led to the creation of a character of anonymity. This characteristic, together with the lack of regulation for their operations in the field, has given cryptocurrencies an interesting potential to pass the law or carry out illicit actions such as money laundering, payment on the black market or even the financing of terrorism. Anonymity also presents a loophole for people to avoid tax on their transactions or wealth. With cryptocurrencies, criminal conduct could never be easier, and these loopholes could potentially shatter the stability of the global political economy.
The Decline of Cryptocurrencies: Why Now?
After peaking in 2021, the value of cryptocurrencies fell at the beginning of the year and worsened at the end of 2022. The fall was brutal and extreme: it was only in March 2022 that the market was to be worth more than the US dollar. 3 trillion; recently, it is barely valued at less than $1 trillion. After 14 years of glory and predicted as the future form of gambling, cryptocurrencies cannot maintain their stability; however, why now? According to Hütten & Thiemann, the vision of a radical decentralization of the financial system has become one of the main factors that have led to the downfall of cryptocurrencies. When the existence of cryptocurrencies has increasingly disruptive potential, new formal regulations are increasingly enforced. Powerful institutions have started to build a legal framework for cryptocurrencies and establish an infrastructure to integrate the developing technology, causing cryptocurrencies to lose their political purposes and have to give up their normative requirements.
Adoption failure also contributes to their decline in desirability. Instead, as a minimum of exchanges, cryptocurrencies were more popular as speculative assets where people profit from their high volatility. As merchants have less commitment to using cryptocurrencies and only use them as payment options among many other payment methods, cryptocurrencies have stagnated in actual adoption. Moreover, the growing integration of cryptocurrencies and stricter rules imposed by powerful entities have made the crypto ecosystem empowered by political power. This means that the values of cryptocurrencies would be affected by the dynamics of the global political situation, such as rising inflation or the war in Ukraine. Ultimately, after 14 years of popularity, cryptocurrencies may abandon the long-held dream of decentralized gambling. Instead, they could end up changing the game to significantly improve the functions of central banks, a far cry from their initial visions.
